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May 14, 2018

Dairy Industry Remains Hopeful About NAFTA 2.0 Deal

 |  By: Tyne Morgan

As North American Free Trade Agreement (NAFTA) negotiations race to the finish line, lead negotiators met in Washington, D.C. last week to work through the tough issues that remain as trade talks with China are expected to resume this week.

“I think what's happening with China will also be the thing that drives NAFTA 2.0 to conclusion because I think this administration will want to remove some of these trade issues that affect agriculture,” said Michael Dykes, CEO of International Dairy Foods Association (IDFA).

Despite the talks spanning over eight months, some in Washington think a new NAFTA deal will be reached.

“I'm cautiously optimistic that though they'll get the outline of an agreement this month,” said Randy Russell, CEO of the Russell Group.

While reports show the U.S. and Mexico made possible progress on the auto portion of the deal, it’s the contentious issue over dairy that’s still a wedge between the U.S. and Canada.

“I believe dairy will be probably one of the last things it's addressed, but I remain optimistic that we'll get something done and Class 7,” said Dykes.

Dykes- among others within the U.S. dairy industry - have had a unified voice form the beginning: Canada’s Class 7 milk pricing structure needs to be fixed.

“I think we've made headway of highlighting the significance of Class 7, and we have that on the minds of this administration,” said Dykes.

Canada established the Class 7 milk pricing for milk powder in 2016. Dairy leaders like Dykes claim the system artificially lowers milk ingredients prices, which they say allows Canadian producers to sell it cheaper to other countries.

“In the short run, we have the highest cost milk producer in the world undercutting us, dumping skim milk powders on the world market and we're losing sales in third country markets,” said Dykes. “They are putting skim milk powder on the ground in Mexico at 3 cents a pound cheaper than we can from the U.S. That this tells you there's an issue there.”

Dykes said that 3 cents a pound difference is reducing appetites for U.S. dairy.

“I was looking at some statistics, and cheese production last year was up about 6 or 7 percent in Canada, and yet imports of milk protein concentrate from the United States were down 38 percent,” said Russell. “So, it's clear this class 7 pricing issue has had an impact on the U.S. dairy industry.”

While it’s already impacting U.S. dairy markets, Dykes said it’s also attracting capital in Canada because it’s a low-cost input.

“Longer term, because those pricing impact of Class 7, there's foreign direct investment and building infrastructure, infant formula plants in Canada other investments across Canada,” said Dykes.

In April 2016, President Trump tweeted his support for dairy farmers, saying “we will not stand for this. Watch!”

In a recent interview with Ray Starling, special assistant to the President for agriculture and agricultural trade, he said the president still has a dairy deal top of mind when it comes to NAFTA.

“When it comes to milk and Class 7, specifically with Canada, do you think we can get a last minute push to get this fixed in NAFTA 2.0?” asked U.S. Farm Report host Tyne Morgan in a recent interview.

“Well there's no doubt - the way you phrased the question, we are very confident that Ambassador Lighthizer has agriculture's best interests at heart,” said Starling. “We are also very confident that Canada knows that this is an issue that we care deeply about. So, I don't think I'm giving away the farm when I say Canada will make us work for this. They will wait to the last minute on this topic.”

While both the president and U.S. Trade Ambassador Robert Lighthizer are focused on dairy, so are leaders in Canada.

Canadian based “RealAg Radio” host Shaun Haney said the political support in Canada from both legislators and the dairy industry remains strong for Canada’s tough dairy stance in NAFTA.

“The dairy lobby and the Canadian government really proving the same discussion points of Canada is not the solution to U.S. dairy supply issues,” Haney said.

He said those leaders continue to pledge to fully support supply management and Class 7 pricing.

“There's so much desire to protect supply management in Canada because it's a system worth protecting,” said Haney. “He (Graham Lloyd, of Dairy Farmers of Ontario) maintained that supply management in Canada is one of the only systems globally that's truly thriving,” said Haney.

While the push on both sides is for opposite outcomes, Russell says NAFTA is the best vehicle to get Canada’s Class 7 pricing system fixed.

“If it's not part of NAFTA, I'm not optimistic we're going to get changes anytime soon,” he said.

Dykes remains hopeful that dairy won’t get overlooked in the trade negotiations, but he said there could also be other means for addressing the issue.

“It defies logic when the highest cost producer in the world can land skim milk powder in Mexico three cents a pound cheaper we can from the U.S.,” said Dykes. “So just on the surface of it- without digging into trade law- that there has to be cross subsidization, there has to be dumping, there has to be some violation of trade law to be able to do that.”

The industry is hopeful creating a level playing field within NAFTA will also help drive dairy demand around the globe.

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